As Bitcoin Price 2022 Begins Slump, Mining Difficulty Increases

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Since the beginning of 2022, the price of Bitcoin (BTC) has fallen by more than 40% from its all-time high (ATH) of $69,044.77 on November 10, 2021.

This price volatility has not affected the network’s ability to increase the difficulty of miners to obtain Bitcoin. As competition among miners continues to grow, Bitcoin’s difficulty hit a new ATH for the second time in two months. The hash rate has also seen a steady 45% increase in 6 months from last July’s lows.

The difficulty of the Bitcoin network is determined by the total computing power, which is associated with the difficulty of confirming transactions and mining BTC.

To fix a block and get the reward, miners face more resistance as the difficulty increases. The miners who failed to catch up have been pushed out of the race. This dilemma between miners securing the network and making enough profit is likely to continue to play out as they determine the viability of their current operations.

Measurements of the hash rate for the network also reported new ATHs being reached following a similar trend to Bitcoin’s difficulty stats. The Bitcoin network appears to be at its peak in terms of security, as the more hash power the network uses, the more distributed the work is for every transaction that occurs in the chain.

Since there is no standard agreement to calculate these metrics, several hash rates have been recorded in recent weeks. Despite the different approaches being used, it is generally agreed that both hash rates and mining difficulties have increased since the last drop in July 2021.

The difference between Bitcoin hash rate and difficulty

Bitcoin mining is the process of adding new transactions to the Bitcoin blockchain. Using proof-of-work (PoW), miners compete to solve math problems that validate transactions.

Bitcoin hash rate indicates the estimated number of hashes made by miners trying to solve the current Bitcoin block or a particular block. For example, new blockchain transactions are added to the system.

Bitcoin’s hash rate is measured in hashes per second (H/s). Miners need a high hash rate to mine successfully.

Both the difficulty and the hash are very large numbers expressed in bits, so to make the operation profitable for miners, the calculation simply requires that the hash be lower than the difficulty.

Bitcoin’s difficulty is calculated by how demanding it is for miners to produce a hash that is lower than the target hash. It grows or shrinks exponentially depending on how many miners compete on the network.

Difficulty adjusts every 2,016 Bitcoin blocks – or about two weeks – to maintain a constant block time, which refers to how long it takes to find each new block while mining.

Blocks are found by miners every 10 minutes. So if miners solve blocks and find Bitcoin more often than every 10 minutes, the difficulty increases. If miners find Bitcoin less often than every 10 minutes on average, the difficulty decreases.

The more miners online, the more hash rate is produced, meaning the more likely the correct hash is discovered quickly. But since blockchains are generally designed to add blocks (and release new coins) at a constant and predictable rate, the difficulty is programmed to automatically adjust after a certain number of blocks to keep that rate consistent.

Bitcoin difficulty in numbers

Bitcoin’s difficulty has consistently increased for every network difficulty adjustment since it reached ATH, regardless of the measurement tools used.

Miners have to work a lot more to solve the equations that process transactions on the blockchain. This is the most important of the fundamental Bitcoin network components as it keeps mining stable regardless of factors such as sentiment, price or black swan events.

Both hash rate and mining issues continue to experience sustained increases since the lowest point last July, when the hash rate dropped to 69.11 exahashs per second (EH/s) (1 exahash = 1 trillion hashes), according to to CoinWarz, while it’s hard to mine reaches a low of 13.6 trillion hashes.

On-chain analysis tools indicated that mining issues reached an ATH of 27.97 trillion hashes on Feb. 18, while the hash rate was 186.77 (EH/s) at the time.

Previously, the new ATH for the network was achieved on January 21 with 26.64 trillion hashes at a hash rate of 173.57 (EH/s).

Although the hash rate and the difficulty are two different factors, they show a correlation to some degree.

The hash rate for the network has also recently reached new ATHs. On February 14, Bitcoin’s hash rate reached 224.17 (EH/s).

Bitcoin Difficulty Adjustment

The last Bitcoin difficulty adjustment occurred on March 3 and saw a negative correction of 1.49%, bringing the difficulty down to 197.19 exahashs. It is the first drop this year after six consecutive increases. The metric automatically adjusts mining effort according to miners’ participation and does not significantly affect the overall upward trend mining difficulties are undergoing.

According to data from Blockchain.com, the six largest known global mining pools have struck 315 blocks (over 56% of the total amount). AntPool and F2Pool contributed the most hash power.

Bitcoin fundamentals can diverge from BTC’s price volatility. Thus, the growing hash rate trend implies that in the longer term, miners’ optimism about the profitability of their operations continues.

Historically, price follows the hash rate. However, this trend is lagging behind current macroeconomic events as fundamentals rise steadily while spot price is uncertain volatility.

The next Bitcoin halving and beyond

The number of BTC miners received for adding new transactions to the blockchain will be reduced as the halving lowers the rewards. The next Bitcoin halving, expected to happen sometime in early 2024, will double Bitcoin’s production costs as block rewards are halved.

Pseudonymous creator of Bitcoin Satoshi Nakomoto discussed the early days of the cryptocurrency on the Bitcointalk forum:

“The price of any raw material tends to gravitate towards the cost of production. If the price is below cost, production slows down. If the price is above cost, profit can be made by generating and selling more. At the same time, the increased production would increase the difficulty, driving the cost of production toward price. In later years, when the generation of new coins makes up a small percentage of the existing supply, the market price will dictate production costs more than vice versa.”

Historical data surrounding critical dates, such as past Bitcoin halvings, tells us that unless an unexpected black swan event happens like last year when China banned Bitcoin mining, Bitcoin difficulty and hash rate will continue to increase.

Being an energy-intensive PoW network, Bitcoin’s basic infrastructure is built to balance the decline in supply and fluctuations in demand. Changing the price accordingly makes Bitcoin a deflationary asset. Bitcoin will continue to increase its difficulty and hash rate as long as miners receive economic incentives that keep their operations profitable.

Miners will struggle to stay competitive if the price does not increase in proportion to the decline in rewards over time. Miners will have to be as efficient as possible to stay in business and develop new technologies that can generate more hashes per second while consuming less energy, contributing to the rise in Bitcoin difficulty.

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